Judge Rules Against United Rentals in Deal Lawsuit

A Delaware judge ruled Friday that Cerberus Capital Management could not be forced to complete its $4 billion deal for United Rentals, a rental equipment operator.

After a two-day trial this week, William B. Chandler III of Delaware’s Court of Chancery said that the private equity firm need only pay a $100 million breakup fee, as stipulated in the deal agreement. United Rentals had argued that Cerberus could not unilaterally break off the deal.

The court battle gained attention amid a recent spate of broken buyout deals. As the credit markets tightened this summer, private equity firms, which had been on an acquisition spree, had second thoughts about their recent purchases.

Some private equity buyers blamed deteriorating conditions in their targets as reasons to walk away, invoking what are known as material adverse effect clauses as escape hatches.

But Cerberus, a publicity-shy private equity firm that has made some very public investments this year, found itself thrust into the spotlight of a legal battle. Its reclusive chief, Stephen Feinberg, was forced to testify in court on Tuesday.

Though Cerberus said it wanted simply to pay the $100 million breakup fee, United Rentals argued that language in the merger agreement prevented the firm from breaking off the deal without invoking that clause. Legal observers said that the contract’s language was sufficiently ambiguous that Judge Chandler could have ruled either way.

In his ruling, Judge Chandler wrote that Cerberus and its lawyers had negotiated the contract with the understanding that they could call off the buyout by simply paying the breakup fee. United Rentals, however, failed to effectively communicate its understanding of the deal agreement.

“From the beginning of the process, Cerberus and its attorneys have aggressively negotiated this contract, and along the way they have communicated their intentions and understandings to URI,” he wrote. “Despite the Herculean efforts of its litigation counsel at trial, URI could not overcome the apparent lack of communication of its intentions and understandings to defendants.”

In a statement, Cerberus said: “The decision validates the Cerberus affiliates’ specifically negotiated ability to refrain from proceeding with the proposed transaction. The decision not to proceed was reached only after a great deal of deliberation and only after exploring all available alternatives.”

In its own statement, United Rentals said: “While we are disappointed by Chancellor Chandler’s decision, we respect it and thank the Court for its prompt review of this matter. The Board of Directors and management team of United Rentals will consider its alternatives under the circumstances and they continue to believe strongly in United Rentals’ future prospects.”

According to Steven M. Davidoff, a law professor at Wayne State Law School, the case highlights the dangers of ambiguously worded deal contracts, picking up on Judge Chandler’s acknowledgment that many such documents are often intentionally vague.

“Chandler’s opinion is a must read for all transactional lawyers – it is a warning that sloppy drafting and a failure to be forthright in your negotiating can come back to hurt you,” Mr. Davidoff told DealBook.

I hope that this sets future precedent where firms like Cerberus don’t have these easy outs on public companies. the irresponsible actions of Cerberus over such a short window of time has had a significant impact on the public market trading in this firm.

I realize that United Rentals must be disappointed that the deal is off, but doesn’t this give them $100 million dollars that they wouldn’t have had otherwise? Or is that just chump change in today’s business world?

Cerberus was always for paying the 100mm — they weren’t arguing that they could walk for free, but that they could just pay the breakup fee (100mm) and walk without invoking an MAE. But yes 100mm is chump change compared to, a) what Cerberus might have lost if they’d gone through with the deal (i.e. why they were willing to go to court to make assert their right to pay not to play), and b) the market value URI has lost in recent months.

The real question is, United Rentals future? With a management team that has botched everything they have done so far, and even one of their past CFO’s going to prison. I don’t see any option they have other then fragmenting this company and/or finding someone with the industry knowledge to put it back together. The only people that could do this are the team that brought NationsRent out of bankruptcy and sold it for a Hugh profit within three years. Bryan Rich, they need you?